While telecommunication sector of
Pakistan has registered spectacular growth in recent years, mainly thanks to
cellular segment the pace of growth has slowed down presently. Nevertheless,
this remained in line with the economic downturn and partially attributable to
the fact that the sector is on the verge of achieving maturity level.

Total teledensity, covering fixed line,
wireless local loop (WLL) and mobile has reached to 60.40% by end November 2008.
This suggests that there still remains room available for further growth.

Also, when we compare the overall
industry position Pakistan still lags behind the coverage mature economies have
achieved. For instance, in USA, telecom and cable sector is showing negative
signs with weakening credit profiles of operators. Wireless Voice average
revenue per user (ARPU) per month has been eroding at an increasing rate. Profit
margins are deteriorating, and some companies within the industry have announced
capital spending reductions for 2009 in response to the expected difficult
operating environment.

While it is expected that some
companies will be able to do this, others may not be able without damaging their
competitive positions. Capital spending for the industry measured as a
percentage of revenue was already down in 2008 compared to 2007, and many
operators may be unable to push it down further in 2009. Growing unemployment,
continued home foreclosures, and changing regulatory environment represent some
of the challenges to the industry in 2009.

These challenges will result in a
changing landscape and difficult operating environment, and the industry
debility is very much likely. In Pakistan, slowdown was witnessed in the
industry during FY08 as compared to FY07, but the overall growth was still
encouraging. The increase in teledensity mainly stemmed from cellular mobile
telecom operators (CMTOs), as the fixed line teledensity had actually declined.
Imports of the sector, constituting 4% of the total import bill, stood at USD
1.33 billion, declining by a marginal 1.3% YoY in FY08.

It is important to note here that it
was the imports of cellular mobile sets that plummeted by 33% year on year to
USD 444 million. The table-1 provides some important indicators about the
sector.

TABLE-1

FY08

FY07

CHANGE

Telecom Revenue (Rs. bln)

278

239

17%

CMTO Revenue (Rs. bln)

182

133

37%

Investment (USD mln)

3,113

3,975

-22%

FDI (USD mln)

1,439

1,824

-21%

Imports (USD mln)

1,331

1,348

-1%

Fixed Line Teledensity

2.70%

3.04%

-34bps

Wireless Local Loop
Teledensity

1.40%

1.08%

32bps

CMTO Teledensity

54.70%

39.94%

1,476bps

Total Teledensity

58.80%

44.06%

1,474bps

Fixed Line subscribers

4,546,443

4,806,206

-5.40%

WLL subscribers

2,260,758

1,850,234

-1.10%

Mobile subscribers

88,019,812

63,159,857

39.40%

Average ARPU (USD/month)

2.8

2.9

-4.00%

Source: Pakistan
Telecommunication Authority (PTA)

REVENUE IN THE SECTOR - BULK BEING
CONTRIBUTED BY CMTOS

Telecom revenues registered a growth of
18% compared to last year, though remained lower than the previous years. This
has primarily been an outcome of lower tariff/ lowers ARPUs. Mobile segment, the
main growth contributors, increased contribution in total revenues by 9bps to
65% in FY08. On the flip side, fixed local loop registered a decline in revenue
in conjunction with its falling teledensity. WLL segment has been a positive
aspect of local loop with increase in subscriber base. No wonder CMTOs
outperformed the rest of telecom operators in the sector with increase in
subscriber base by 39.40%. It comes as no surprise that telecom sector is a main
contributor to national exchequer in form of sales tax, activation tax and
federal excise duty. Taxes in FY08 amounted to Rs. 111 billions (FY07: Rs. 100
billion) with CMTOs providing 80% of the GST collections.

CELLULAR - ARPU TAKING DOWNWARD
DIRECTION

The cellular segment of Pakistan's
telecom industry has been dominated by Mobilink. The factors enabling Mobilink's
domination of the market have been (a) it is the first service provider to offer
GSM-based services and (b) initiator of pre-paid services. However, entry of new
players posed stiff competition to the pioneer, which resulted into declining
market share of Mobilink. Cellular sector has turned into the fastest growing
segment of telecom industry over recent past, and cellular subscribers have
increased manifold. The cumulative revenues for this segment took a hike of 37%
compared to the last year in line with increase in subscriber base.

Pre-paid connections provided the main
impetus to this growth. The recent run-up in subscriber numbers has been boosted
by (i) aggressive marketing campaigns with reduced tariffs and subsidized SIMs
reducing upfront cost for the cellular subscribers, (ii) reduction in government
taxes on cellular connections and (iii) increased coverage area.

While the addition in subscriber base
has been more than impressive, the sheen is taken off a bit as industry experts
cry foul over these numbers. The number of subscribers is grossly inflated as
these include inactive SIMs in circulation. Lower upfront cost to purchase a SIM
led to sale of large number of SIMs, which are never activated or activated for
short period of time. Another risk to the industry is constantly declining ARPU
(Average Revenue per User) owing to (i) the fact that growth is coming largely
through pre-paid connections which yield lower ARPU, (ii) declining tariffs and
(iii) inactive SIMs. The table-2 represents the comparison of CMTO's revenues
and ARPUs year on year basis.

Table-2

COMTO's Revenues (Rs.
Billions) COMTO's ARPUs (USD/month)

FY08

FY07

FY08

FY07

Mobilink

79.9

64.7

3.4

3.4

Ufone

27.5

21.9

2.0

2.1

Zong

2.6

2.9

0.9

3.9

Instaphone

0.3

0.5

1.1

1.9

Telenor

45.1

22.8

3.3

2.9

Warid

26.8

20.4

2.3

2.6

Total

182.1

133.1

2.8

2.9

%
Change

37%

48%

-4%

-20%

Source: Pakistan
Telecommunication Authority (PTA)

Customer satisfaction has been
sacrificed over addition in subscribers. In the mean time, as against the
previous expectations that the market structure could alter with the
implantation of MNP (Mobile Number Portability) owing to quality issues and less
awareness this technique could not have significant impact on the overall
market.

Going forward, growth in the segment
would only be possible if any of the existing operators is able to set-up its
quality and establish itself as the quality leader.

INVESTMENT IN THE SECTOR - STILL IN
FLOW

Though lower than FY07, investment in
the telecom sector still stood at an encouraging level and 74% of investment
originated from cellular segment, notwithstanding that has also witnessed
decline of 11% year on year basis. The decline in investment is largely
attributable to the fact that CMTOs have already laid down their infrastructure
in the urban areas to be able to compete effectively. Foreign Direct Investment
in the telecom sector, down 21%, still constitutes 28% of the total FDI (FY07:
35.6%), only lagging behind the financial sector.

The privatization proceeds in FY08
amounted to USD 133.2mln, a decline of 50% YoY. Telenor has been the biggest
contributor to FDI (34% share), accounted for USD 486mln while Warid Telecom and
Worldcall reported a level of USD 214mln and USD 203mln respectively. It is
expected that the trend of investment will continue in next five years because a
large potential market still exists in Pakistan, and all operators intend to
grab their share.

OUTLOOK - DIVERSIFICATION IS MUCH
NEEDED

Although telecom sector will keep
growing in years to come the pace would be slower than ever and the reason
behind that is expected to be declining fixed line subscriber and thus revenue.
Average revenue per user is likely to decline further, mainly because of
changing mix of subscriber base with increasing proportion of prepaid customers
and reducing tariffs in the wake of mounting competition amongst telecom
operators to achieve higher volumes. Nevertheless, normalization of growth in
the sector is likely to reinforce the importance of quality of service as
critical criteria to retain customers. This can only be compensated through
diversification into various segments. Further, given the fact that there is lot
more untapped avenues, it is still very much a numbers game. Companies that
capture the greatest market share during this super-normal growth phase will be
in a best position to reap rewards in the long run.

STANDARD CHARTERED
LEASING ACCORDED A PLUS

PAGE REPORT

The Pakistan Credit Rating Agency
(PACRA) has assigned a long-term rating of "A+" (A Plus) and a short-term
rating of "A1" (A One) to Standard Chartered Leasing Limited (SCLL). These
ratings incorporate the liquidity and funding comfort SCLL is enjoying in
the form of preferential credit lines from various financial institutions
as well as its own parent at relatively better rates in an era where the
whole leasing sector is facing a challenging environment with restricted
access to funds.

The ratings reflect SCLL's sound
financial profile, a leading market position, robust risk management
systems, and a quality management team. At the same time, PACRA recognizes
the financial strength and international profile of the parent - Standard
Chartered Bank (Pakistan) Limited (SCBPL). SCBPL has reaffirmed its
support through a recent equity infusion (current ownership: 86.5%)
alongwith developing its experienced management team

During FY08 SCLL realigned its
organizational structure under focused attention of the Board of Directors
to restart its business activities afresh. SCLL's management has devised a
comprehensive strategy and intends to further improve its market standing
through sustained growth in the targeted segments.

Commenting on the rating Mr.
Badar Kazmi, Chairman, Standard Chartered Leasing Limited (SCLL) said, "An
accreditation by a recognized body like PACRA is a testimony to our
commitment of growing our leasing business in Pakistan making Standard
Chartered Leasing Limited a leading player in the leasing industry."